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The liability issues associated with operating a business as a sole proprietorship or as a single member limited liability company differ significantly. Because an appropriate level of asset protection -- or lack thereof -- can save or destroy a business, it is important to consider both the personal and business liability implications of each organizational approach when deciding which type of business structure to adopt.

Sole Proprietorship

No specific action is required to become a sole proprietor. Any individual operating as a business is considered a sole proprietor. There are no official forms to file or fees to pay. You file a personal tax return with your Social Security number serving as your employer identification number. Your business assets are not separated from your personal assets. Both are in jeopardy if one or both are put at risk by a creditor, lawsuit or other event.

Single Member LLC

A limited liability company is an officially authorized business entity. Forming an LLC requires you to register the business, pay designated fees and conform to specific legal requirements. As the name implies, an LLC provides some liability protections to the owner. Your nonbusiness assets cannot be used to fulfill unmet LLC debts and commitments. Exceptions exist when a personal guarantee was made in advance, such as using your own credit to obtain an LLC loan, or when you are personally responsible for an accident or libelous situation.

Personal Liability

As a sole proprietor, you and your business are considered one entity. As a result, you face unlimited personal liability for debts and legal liabilities incurred by your business. Your home, automobile, bank accounts and other personal assets can be seized to satisfy unmet business financial obligations. In an LLC, which is viewed as a separate legal entity from the owning individual, you are not held personally liable for the company’s indebtedness. Your financial contributions to the LLC are at risk, but with a few rare exceptions, your personal assets are not up for grabs.

Business Liability

The idea of protecting personal assets from business liabilities is established. However, it is just as important to consider the reverse scenario. What happens to your business if your personal liabilities become unmanageable due to bad investments, credit card debt, unexpected medical bills or divorce? A sole proprietorship provides no protection for your company if misfortune strikes your personal life. An LLC provides similar business liability protection as a corporation when it comes to personal problems. With an LLC, your business assets cannot be used to meet demands by personal creditors.

About the Author

Shari Parsons Miller has been a business writer since 1992. Her work has appeared in “Business Innovators-Internet & Computer Technology,” “Dallas Business Journal” and “Encyclopedia of Small Business.” Parsons Miller holds a Master of Arts in journalism from Cardiff University, Wales, U.K.